Citigroup reveals second alleged fraud in Mexico

SaabiraChaudhuri

Citigroup Inc. said it has discovered alleged fraud in its dealings with a second company in Mexico, which a person familiar with the matter identified as Representaciones y Distribuciones EVYA.

EVYA, an engineering and construction firm, is a supplier to Mexican state-owned oil company Petróleos Mexicanos, or Pemex.

On a media call, Chief Financial Officer John Gerspach said the alleged fraud was under $30 million and that the bank expects to receive full restitution. Citigroup declined to comment on the identity of the supplier. Directors at EVYA didn't immediately respond to requests for comment.

The disclosure was overshadowed on a day when the bank disclosed higher-than-expected earnings. The bank also noted on its earnings call that it logged $165 million in new credit costs tied to the Pemex supplier program. Pemex has offshore operations that produce about half of its total crude-oil production of 2.5 million barrels a day.

In February, Citigroup said it had found an apparent gap of $400 million in an account that owed money to Citigroup's Mexico unit, Banco Nacional de Mexico, or Banamex. The problems started after Banamex extended credit to a Mexican oil-services company, Oceanografía SA de CV to finance amounts that were allegedly owed to the oil-services company by Pemex. A Citigroup review of its relationship with Oceanografía--a supplier to Pemex--led the bank to discover that a significant portion of the amounts allegedly owed to Banamex were based on fraudulent invoices from Oceanografía.

Mexican Attorney General Jesús Murillo Karam said last week that the government is seeking bankruptcy proceedings for Oceanografía in an attempt to save the company's 11,000 jobs, maintain its operations for Pemex, and to pay back creditors where possible. Representatives of Oceanografía have been unavailable to comment since the government intervened in the company's operations at the end of February.

EVYA on its website says it has worked with Pemex and private companies for over 20 years and specializes in offshore construction projects such as helipads.

In 2012, the firm won three Pemex contracts for the construction of an offshore housing unit, a marine platform and supporting oil operations at the Dos Bocas port, where Pemex has a major oil-export terminal, according to a news release by the Dos Bocas port authority. The three contracts combined are worth more than $150 million (two billion Mexican pesos), the port authority said.

A spokesman for the Mexico attorney general's office said Banamex hasn't filed a formal complaint on a second case of alleged fraud and that prosecutors cannot take any action until such a complaint is filed. The attorney general's office is currently investigating the alleged fraud at Oceanografía.

Citigroup had discussed the potential for issues at other suppliers at a conference last month. At that time, the bank had said it had found "concerns of some nature" in three other supplier-finance receivables portfolios. The concerns were discovered as part of a global review Citigroup recently launched of its supplier finance receivables around the world. Mr. Gerspach said on Monday the bank had ultimately found some issues with just one of those three suppliers.

Mr. Gerspach said the new fraud involved "similar issues" to the one disclosed in February, when the bank was forced to announce it was cutting its fourth-quarter and full-year results by about $235 million, or up to $400 million pretax, after finding the allegedly fraudulent billings at its Mexico unit.

On a conference call with analysts, Chief Executive Michael Corbat said Citigroup is working closely with the attorney general in Mexico regarding the Oceanografía matter. "We're continuing our rigorous investigation into how the fraud was committed and how our controls were breached," he said, adding that the bank is continuing to try to recover any misappropriated funds.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and Laurence Iliff at laurence.iliff@wsj.com

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.